The Global Financial System’s “Monetary Divorce” From Dollar Hegemony — The Return of Gold

For the past decade, Zoltan Poszar has arguably been the world’s foremost expert in the ugly nuances and arcanery in world money-markets (and more recently, on how the financial and physical markets overlap on the geopolitical chessboard). However, amid all the chaos at Credit Suisse, the erstwhile expert on all things ‘pipes’ in the global funding markets has decided to go out on his own.

The name of his new firm is Ex Uno Plures, “and I will be providing research to institutional investors and consult institutional investors about the plumbing,” Poszar explains at the start of this discussion with Bloomberg’s Odd Lots podcast.

The former Credit Suisse man expounds on the concept of “Bretton Woods III” and the changing dynamics in the global economy, explaining that the traditional idea of a unipolar world dominated by the US dollar is shifting, and we are entering an era where multiple currencies will play a significant role. Simply put, he notes, the global financial system is going through a “monetary divorce” from US dollar hegemony and becoming more multi-polar.

“You know, these topics: de-dollarization, the re-monetization of gold, using central bank digital currencies to build out, to knit out a de novo financial system, you know, the petroyuan and the renminbi invoicing of commodities and traded goods going forward.”

Zoltan highlights the growing focus in the West on reducing dependence on Chinese supply chains and becoming more self-sufficient in key areas.

On the other hand, in the East, there is a focus on extracting themselves from the Western financial system and de-risking their relationship with the US dollar and Western financial institutions.

“If you go into a world where trade is not dominantly invoiced in dollars… it’s no longer a machinery where the dollars are getting created on the margin, the dollars are getting accumulated on the margin. And the question is how do you recycle the earned dollars back into funding and rates market?”

He mentions that there have been developments indicating a move away from the US dollar as the dominant currency, such as the renminbi (Chinese currency) being used for invoicing commodities and the increasing use of central bank digital currencies (CBDCs).

“We are starting to see evidence that more and more commodity trades are being settled in renminbi… you can have a lot of ground that renminbi could gain.”

Zoltan suggests that CBDCs could create a new network of correspondent central banks, facilitating direct settlement of international transactions between central banks rather than relying on correspondent banks.

By establishing this state-to-state and central bank-to-central bank network, independent of Western financial centers and the dollar, Zoltan believes it could provide an alternative to the current dollar-based system.

“The underlying issue here is very much one where if you look at this unipolar world… you should be imagining correspondent central banks.”

Regarding the role of CBDCs, Zoltan suggests that they can be a part of RMB internationalization. CBDCs can help raise offshore RMB and tap swap lines with the People’s Bank of China (PBOC). He highlights the overlap between countries planning or piloting CBDCs and the network of swap lines with the PBOC. Zoltan notes that evidence shows an increasing number of commodity trades being settled in renminbi, and the share of renminbi in trade finance has been growing, indicating a potential gain in the currency’s importance in the coming years.

“Gold is definitely something that’s coming back as a theme… we are seeing this more and more in the data that especially the countries that are not geopolitically aligned to the US are shunning Treasuries and shunning the dollar and they are buying gold instead.”

He also emphasizes the need to rethink the role of central banks as dealers of last resort in the foreign exchange (FX) market, particularly for the global East and South, in the context of CBDCs and the correspondent central bank system.

Zoltan believes that the evolving dynamics of global trade and the emergence of multiple currency options for payment will have significant implications for dollar funding and rates markets. He mentions that if countries have the option to pay for commodities in different currencies such as dollars, renminbi, or gold, it could reshape the FX swap market and the demand for dollars. The accumulation of dollar reserves by countries, such as China, may also be affected if they can use their own currency for commodity imports, reducing the need for large dollar reserves.

“You can pay dollars for oil, but you can also pay renminbi for oil. But if you are a gold miner, you can also pay for oil with gold… You would just choose whichever one is cheaper.”

Shifting his focus from global to local, the money-market-mage mentions mentions that the solutions crafted by the Fed to address liquidity problems, such as the Bank Term Funding Program (BTFP), were powerful and surprising. He acknowledges that the BTFP program received mixed responses, with some seeing it as the right move within the framework of Basel III regulations, while others criticized it for potentially undermining the need for interest rate risk management in banks’ portfolios. Nevertheless, Zoltan believes that the BTFP is now a part of the system and will likely remain as a standard feature.

He highlights the importance of the BTFP in supporting the Treasury market by preventing banks from liquidating underwater bonds and potentially causing further strain in the market. The program provides a mechanism for banks to access liquidity without disrupting the market and serves as part of the scaffolding of the financial system.

He points out that while blanket deposit insurance may not be implemented, the Federal Deposit Insurance Corporation (FDIC) acts as a buffer between the troubled institution and the Federal Reserve, ensuring that the Fed’s lending is secured to its satisfaction.

Zoltan explains that the banking system will likely deal with problems on a case-by-case basis. While there may be challenges in credit portfolios and commercial real estate lending books, as well as potential consolidation across the banking system, there are levers that the Fed can pull to help resolve issues. He notes that interest on reserves provides banks with a steady stream of interest income, which can indirectly help pre-fill their capital base.

Zoltan also mentions the role of larger institutions like JPMorgan and the potential for banks like Wells Fargo, which still have unused balance sheet capacity, to assist in cleaning up issues if needed. He emphasizes that while there may be micro-dislocations and challenges in specific areas, the overall banking system is fine, and the key is to anticipate and position appropriately.

“I think the banking system is fine for now… There will be consolidation across the banking system. But there are many levers that the Fed pull to help clean things up.”

Regarding shadow banking, Poszar explains that if his thesis about world trade invoicing in currencies other than the dollar comes true, it could provide balance sheet relief for global systemically important banks (GSIBs). The shift of market making and FX functions to the balance sheets of central banks and the migration from correspondent banks to correspondent central banks would potentially benefit US banks, allowing them to use their balance sheets for other purposes.

“Regarding that shadow banking question… I think over time that’s going to provide balance sheet relief to all the GSIBs because FX market making, credit lines exclusively provided in US dollars… that’s the bread-and-butter domain of JP Morgan, Bank of America, and Citibank.”
He suggests that as the shadow banking system deals with credit and real estate problems, the banking system could become a source of strength, providing both capital and balance sheet capacity.

“It’s better to suffer those losses in non-banks than banks because banking crises are very nasty things.”

Zoltan concludes by noting that the concept of shadow banking has evolved, and he focuses on the new frontier of traditional financial functions migrating to the balance sheets of central banks, central bank digital currencies (CBDCs), and different currencies. He believes this shift will drive rates and funding markets in the future and intends to focus on mapping and understanding this new shadow banking terrain.

Finally, Poszar highlights the fact that “in the IMF data and in the data of the Gold Council, we see this massive increase in foreign central banks’ purchases of gold.”

“That gold aspect definitely survives… You basically have gained sovereignty from a monetary perspective… So again, you will not have to run with as much FX reserves… 

…I think that gold aspect definitely survives… I think the commodity shortage and this… I think it’s definitely there in gold.“